OrdinanceTax Law
Income Tax Ordinance [New Version]
פקודת מס הכנסה [נוסח חדש]
Published: 1961-04-25Last amended 2026-06-08✓ Amendment status checked against the Knesset legislation record on 2026-09-04
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Unofficial English translation — for reference only. It may contain errors or omissions and cannot be relied on as a legal text. Only the Hebrew text published in Reshumot is legally binding.More
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Despite these checks, it may contain errors, omissions, or imprecise renderings of legal terminology and cross-references, and it may not yet reflect the latest amendments. It cannot be relied upon as a legal text.
The Hebrew text as published in Reshumot (ספר החוקים) and on the Knesset website is the sole authoritative and legally binding version. In any discrepancy, the Hebrew text prevails.
This translation is provided for informational purposes only and does not constitute legal advice. For use in legal proceedings, request a certified Expert Legal Opinion.
Section B: Deductions of Depreciation
Depreciation of Assets§
21.
(a)A deduction shall be permitted for the depreciation of a building, machinery, fixture, furniture or other assets owned by the taxpayer and used for the purposes of producing his income, including live and dead inventory in agriculture and including plantations; the amount of depreciation shall be calculated as percentages — to be prescribed with the approval of the Finance Committee of the Knesset for each case or for each category of cases — of the original price paid by the taxpayer, excluding the price of the land on which the building was erected or the plantations planted, all as the case may be, provided that the particulars prescribed have been duly furnished; for the purposes of this section, a long-term lease of real property for a period of 49 years or more shall be treated as ownership thereof, and a person who, notwithstanding that he has assigned an asset, is liable to tax thereon pursuant to sections 83 or 84, and a person who has transferred an asset but has reserved to himself the right to enjoy the fruits thereof, shall each be deemed the owner of the asset, provided that the depreciation permitted to him shall be the depreciation that would have been permitted to him but for the assignment or transfer as aforesaid.
(b)If a grant was received in respect of the acquisition of an asset for which depreciation is deductible under subsection (a), or if a debt originating from a loan for the acquisition of such an asset was waived or released within five years of the year in which it was received, or if value added tax was paid in respect of the acquisition of an asset and the taxpayer deducted that tax as input tax under the Value Added Tax Law, 5736-1975, the original price of the asset, both for this purpose and for the purpose of section 88, shall be its price as aforesaid less the amount of the grant, the debt or the input tax, as the case may be; this provision shall not apply to an amount charged to tax under section 3(b)(2).
(c)A person who has incurred expenses for the purpose of complying with directions given to him to install special facilities for the disabled in a public building pursuant to section 158c of the Planning and Building Law, 5725-1965, shall be permitted to deduct those expenses as depreciation at a rate of 16½% per annum; this provision shall not apply to a person who incurred such expenses in a building whose construction was completed after the 25th of Adar Bet 5741 (31 March 1981).
(d)The Minister of Finance, with the approval of the Finance Committee of the Knesset, may prescribe that in respect of an apartment that was let for residential purposes in a particular tax year and whose owner is not entitled to benefits under Chapter VII 1 of the Capital Investment Encouragement Law, 5719-1959, a depreciation deduction calculated as a rate of the value of the apartment shall be permitted, and may, with such approval, prescribe rules for calculating the value of the apartment.
Carrying Forward of Depreciation from Year to Year§
22.
If in a particular tax year it was impossible to deduct the depreciation, in whole or in part, because in that year there was no income at all from the source in respect of which the depreciation was claimed, or because the income was less than the amount permitted to be deducted as aforesaid, the amount not deducted shall be deemed a loss for the purposes of section 28; this provision shall not apply if the source in respect of which the depreciation was claimed is not a business or profession, and in such case the amount not deducted shall be deemed a loss that may be set off in successive future years against that source alone.
Limitation on Depreciation Deductions§
23.
The total depreciation deductions permitted under the Ordinance, together with the total wear and tear during the period prior to the date from which depreciation was permitted under this Ordinance, calculated at the prescribed rates, shall not exceed the original price paid by the taxpayer for the assets referred to in section 21, excluding the price of the land on which the building was erected or the plantations planted, all as the case may be; however, for the purpose of the original price of a citrus orchard, the depreciation deductions and wear and tear during the period preceding the year 1950 shall not be taken into account.
Depreciation upon Transfer of an Asset Not Accompanied by Transfer of Control§
24.
(a)Where a depreciable asset has been transferred from one person to another and the Administrator is satisfied and has decided that control of the transferred asset has remained with the same person in whose hands it was before the determining date, the amount of depreciation that the transferee is entitled to deduct under sections 21–23 shall be the amount that the transferor would have been entitled to deduct had he not transferred it; and if the transfer took place before the first of April 1946, and the transferee deducted depreciation under sections 21–23 in an amount exceeding the amount he would have been entitled to deduct under the provisions of this section — the excess shall not be deemed to have been deducted unlawfully, but it shall be taken into account when calculating the total depreciation amounts permitted under section 23.
(a1)Where a depreciable asset has been sold and the seller reacquired it, the amount of depreciation that the seller is entitled to deduct under sections 21 to 23 after the reacquisition shall be the amount he would have been entitled to deduct had he not sold it.
(b)The provisions of subsection (a) shall apply to the transfer of assets from two or more persons to one person, in the same way as they apply to such a transfer from one person to another, if the Administrator is satisfied and has decided that control of the transferred asset has remained as a whole with those persons in whose hands each of them individually held a part of the transferred asset before the determining date.
(c)The provisions of this section shall not apply if the transfer was subject to capital gains tax under Part 5 or where the capital gain was set off against a loss, provided that an amount equal to the inflationary amount within its meaning in section 88 on which tax was paid at the rate of 10% shall be reduced from the original price; the reduction shall also be taken into account for the purpose of the definition of "original price" in section 88.
(d)A decision of the Administrator under this section may be appealed pursuant to sections 153–158.
What Constitutes Control§
25.
"Control" for the purposes of section 24 — direct or indirect control or the ability to control or the right to acquire such control, and in particular — but without derogating from the foregoing generality —
(1)where the control is by virtue of shares — holding the majority of the share capital, or the majority of the issued share capital, or the majority of the voting power, or the right to hold or acquire these, as well as the right to receive the majority of the profits, or to appoint the majority of the directors, or the right to acquire such a right;
(2)where the control is in any other manner — the right to the majority of the capital, the majority of the profits, the majority of the voting power or to appoint the majority of the directors, or the right to acquire such a right.
Who is the Holder of Control§
26.
(a)When determining whether control for the purposes of section 24 is or was in the hands of a particular person, his relative, within its meaning in section 76(d), shall be deemed to be that same person.
(b)If at any time within 3 years after the transfer, control of the transferred asset is again found to be in the hands of the transferor, it shall be deemed to have remained in his hands from the outset.
What is the Determining Date§
26a.
"The determining date", for the purposes of section 24 — the date of the transfer of a business or asset or the date of the making of the transaction of which the said transfer forms part or is connected thereto, or the date on which the first of the transactions of which the said transfer forms part or is connected thereto was made, all as the case may be.
Deduction for Replacement of Machinery and Equipment§
27.
(a)A person engaged in any business or vocation who has expended in a given tax year a given sum for the replacement of machinery and equipment used or that were used in that business or vocation shall be allowed, for the purpose of ascertaining his taxable income, a deduction of an amount equal to the expenditure incurred in acquiring the old machinery and equipment less the total depreciation deducted in respect of that machinery and equipment and the amount received on their sale, or equal to the amount expended on the new machinery and equipment, whichever is the lesser; where an amount has been deducted under this subsection, any loss that may be set off under Part 5 in respect of the sale of the old machinery and equipment shall be reduced by that amount.
(b)Subsection (a) shall not apply to a private motor vehicle within its meaning in the Traffic Ordinance [New Version].
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Contact Us →Section C: Set-off of Losses
Deduction for Depreciation in Exchange of Real Property and in Evacuation and Construction§
27a.
(a)In this section, every term shall have the meaning ascribed to it in the Land Taxation Law, unless expressly stated otherwise.
(b)In an exchange of a right in real property pursuant to Chapter V 3 of the Land Taxation Law, the following provisions shall apply with respect to a deduction for depreciation and also with respect to an additional deduction on account of depreciation or amortisation as their meaning in section 3 of the Inflation Adjustments Law:
(1)The original price of the substitute right shall be one of the following, as the case may be:
(a)Where the adjusted value of the substitute right equals the sale value of the sold right — the residual original price of the sold right;
(b)Where the adjusted value of the substitute right is less than the sale value of the sold right — the residual original price of the exempt sold right;
(c)The provisions of subsection (b) shall apply, with the necessary modifications, also with respect to a sale to a developer of another unit in the complex, the consideration for which was received as another unit as referred to in Chapter V 4 of the Land Taxation Law, up to the value ceiling;
(2)The original price of the part of the substitute right shall be the residual original price of the sold right;
(3)The original price of the additional substitute right shall be — its value on the day of its acquisition;
(4)The rate of depreciation shall be the rate prescribed for the deduction for depreciation in respect of the substitute right or the additional substitute right, as the case may be;
(5)Depreciation as aforesaid, in this section, shall be granted only if the substitute right, the part of the substitute right or the additional substitute right, as the case may be, are depreciable assets.
Set-off of Loss§
28.
(a)A loss that a person sustained in a business or vocation in the tax year, which, had it been a profit, would have been assessed under this Ordinance, may be set off against the total taxable income of that person from other sources in that same tax year.
(b)Where it is not possible to set off the entire loss in a tax year as aforesaid, the amount of the unset-off loss shall be carried forward to the succeeding years one after another and set off against the total taxable income of that person in those years from a business or vocation, including capital gain in a business or vocation, or set off against the total taxable income of that person in those years under section 2(2), provided all the conditions set out below are met, and all subject to the proviso that if it was possible to set off the loss in one of those years, it shall not be permitted to set it off in the following year:
(1)That person had no income from a business or vocation in the year of set-off;
(2)That person ceased to engage in the business or vocation in respect of which the loss he sustained is sought to be set off;
(3)The source of the loss sustained by that person is not from a house company as its meaning in section 64, from a family company as its meaning in section 64a or from a transparent company as defined in section 64a1(a).
(c)Notwithstanding the provisions of subsections (a) and (b), if the taxpayer so requests, a loss shall not be set off under this section against a capital gain that is an inflationary amount, and in the case of an individual, also against a capital gain, interest or dividend if the rate of tax applicable thereto does not exceed 25%.
(d)A loss that a person sustained in a citrus grove planted grafted, in the fifth and sixth years from the beginning of the tax year in which it was planted, shall be set off against his income from that grove only in the sixth and seventh years.
(e)A loss that a person sustained in a citrus grove planted ungrafted, in the sixth and seventh years from the beginning of the tax year in which it was planted, shall be set off against his income from that grove only in the seventh and eighth years.
(f)A loss that cannot be set off as referred to in subsections (d) and (e) shall be subject to the provisions of subsection (b).
(g)For the purposes of subsections (d) and (e), a citrus grove planted after 30 November of any year shall be regarded as if it were planted in the first month of the following tax year.
(h)A loss that a person sustained from the letting of a building may be set off against his income from that building in the following years.
(i)(Repealed)
(j)In this section, "taxable income" and "capital gain" — include appreciation as its meaning under section 6 of the Land Taxation Law (hereinafter — real property appreciation).
Loss Sustained Outside Israel§
29.
Notwithstanding the provisions of section 28, the following provisions shall apply to a loss originating outside Israel:
(1)
(a)A loss sustained by a resident of Israel outside Israel in the tax year, which, had it been a profit, would have been liable to tax as passive income, shall be set off against taxable passive income from outside Israel; however, a loss from rental of a building that originates in depreciation shall also be permitted to be set off against a capital gain on the sale of that building; for the purposes of this section, "passive income" — income from interest, linkage differentials, dividends, rent or royalties, that is not income from a business or vocation;
(b)Where it is not possible to set off the entire loss in the tax year, as referred to in sub-paragraph (a), the amount of the unset-off loss shall be carried forward to the succeeding years one after another and set off against the taxable passive income generated outside Israel in those years, provided that if it had been possible to set off the loss in one of those years, it shall not be permitted to set it off in the following year; however, a loss from rental of a building originating in depreciation, carried forward from previous years, shall also be permitted to be set off against a capital gain on the sale of that building;
(2)A loss sustained by a resident of Israel in a business or vocation outside Israel, which, had it been a profit, would have been liable to tax in Israel, shall be subject to the following provisions:
(a)A loss sustained in the tax year shall first be set off against taxable income, including capital gain, in that same tax year from a business or vocation outside Israel;
(b)If a loss balance remains after a set-off as referred to in sub-paragraph (a), the balance shall be set off as aforesaid against taxable passive income from outside Israel remaining in that tax year after a set-off as referred to in paragraph (1)(a);
(c)If a loss balance remains after a set-off of a loss as referred to in sub-paragraphs (a) and (b), and that loss balance is in a business outside Israel whose control and management are exercised in Israel (in this section — the controlled business), the balance shall be set off, if the taxpayer so requests, against taxable income generated or accrued in Israel in that tax year;
(d)Where it is not possible to set off the entire loss in that year, as referred to in sub-paragraphs (a) and (b), and if the taxpayer chose that the provisions of sub-paragraph (c) shall apply to him, a loss as aforesaid that could not be set off under sub-paragraphs (a) to (c), the amount of the unset-off loss shall be carried forward to the succeeding years one after another and set off against the taxable income of the taxpayer, including capital gain, in those tax years, from a business or vocation outside Israel;
(e)Notwithstanding the provisions of sub-paragraph (d), if a loss balance remains after a set-off as referred to in that sub-paragraph and the loss balance is from a controlled business, the loss balance shall be set off, if the taxpayer so requests, against his taxable income, including capital gain or appreciation as its meaning in the Land Taxation Law, from a business or vocation in Israel; an amount set off as aforesaid shall not be carried forward for set-off in the following tax years under the provisions of sub-paragraph (d);
(f)(Repealed)
(3)A loss sustained by a resident of Israel outside Israel, which, had it been a profit, would not have been liable to tax in Israel, shall not be permitted to be set off;
(4)Section 28(c) shall apply, with the necessary modifications, also for the purposes of this section;
(5)A loss as referred to in this section shall be permitted to be set off only if a return for the tax year in which the loss was incurred was filed with the assessing officer, as referred to in sections 131 and 132;
(6)The Minister of Finance, with the approval of the Finance Committee of the Knesset, may prescribe provisions for the implementation of this section, including with respect to the means of proving the loss.
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